Glencore's Australian arm moved billions through Bermuda

Paradise Papers reveal use of cross-currency interest rate swaps, which are under investigation by the tax office

Glencore operations in Newcastle, Australia. The Paradise Papers show that in 2013 two Bermuda-based arms of Glencore exchanged $25bn in Australian dollars to US dollars through Glencore Australia Investment Holdings.
Photograph: Bloomberg via Getty Images, Guardian design team

The Australian arm of the global mining giant Glencore has been involved in cross-currency swaps of up to $25bn of a type under specific investigation by the Australian tax office, the Paradise Papers reveal.

Glencore, the world’s largest mining company by revenue, has attracted significant controversy since its entry into the Australian market in the mid-1990s over its tax strategies, degradation of sacred Indigenous lands, and black lung and lead blood poisoning among its workforce and their families.

Its massive global network of subsidiaries and related companies has been revealed by the release of the Paradise Papers, a cache of more than 13m documents including files from the premier offshore law firm Appleby. Glencore is one of Appleby’s largest clients. The material in the Paradise Papers comes from two offshore service providers and the company registries of 19 tax havens, and was obtained by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists with partners including the Guardian.

The Paradise Papers reveal Glencore Australia was involved in huge cross-currency interest rate swaps – complex financial instruments previously targeted by the Australian Taxation Office for investigation, under suspicion they are being used to avoid paying Australian tax.

The swaps, which are lawful, are used to transform interest payments in one currency into another currency. But tax authorities around the world are concerned by their being used between arms of multinational companies to enter into deals at unrealistic, non-commercial rates, then using the swaps as a way to shift profits from high-tax to low-tax jurisdictions.

The Paradise Papers show that on 12 April 2013 two Bermuda-based arms of Glencore – Glencore Capital and Glencore Finance (Bermuda) – changed $25bn in Australian dollars to US dollars through Glencore Australia Investment Holdings.

Another Australian entity, Glencore Australia Finance, engaged in currency swaps with Bermuda-based Glencore Capital: for A$25m on 15 April 2013; and A$10m on 24 June.

Cross-currency interest rate swaps are not illegal and are often a legitimate commercial transaction between arms of a multinational company, but the ATO has said it is concerned the arrangements are being used – in particular by oil and gas companies – to avoid withholding tax.

In March last year, the ATO issued an alert about the practice. “Under these arrangements, companies use their related party financing arrangements to create an alleged need to swap currencies and periodical payments for questionable commercial reasons,” it said. “We are concerned that these arrangements achieve contrived thin capitalisation, withholding tax and transfer pricing outcomes.”

It also threatened to sink the currency swap deals in a submission to a Senate inquiry this year into corporate tax avoidance. It said it was “scrutinising a number of these deals” that “do not reflect commercially rational behaviour” and, it suspected, had been entered into to avoid tax.

The ATO has said it will soon have access to significantly more information about multinationals’ transactions, through new measures such as country-by-country reporting – where multinationals are required to report their global structures and tax affairs by country. And it has additional powers where multinational groups seek to obscure their global operations, including the diverted profits tax, which came into effect on 1 July.

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“Under the diverted profits tax, we can issue an assessment at a 40% tax rate where profits are being shifted to low-tax jurisdictions without the necessary economic substance,” the tax office says. “This will increase the onus on multinational groups to be up front about their global structures and provide information to us voluntarily.”

Glencore Australia’s taxation arrangements have come to the ATO’s attention previously. In 2015, Glencore revealed before the Senate it was under audit by the ATO for the low level of taxes it paid, its complex arrangement to claim billions in “losses” overseas to offset its tax bill, and resorting to low-tax or no-tax jurisdictions such as Bermuda, Singapore and the Cayman Islands.

As a result of previous tax audits, Glencore said it had paid an additional $42m in tax.

A spokeswoman for the ATO said the tax office identified cross-currency interest rate swaps as “transactions of concern with the potential to proliferate”. The ATO identified 20 groups with swaps of concern, all of which are either under audit, or have been resolved, with companies paying additional tax where necessary.

“All evidence is that there has been a significant change in how multinational companies are approaching their Australian tax obligations. They are seeking to engage with us earlier, and many are proactively working with us both to resolve legacy issues but, perhaps more importantly, to ‘lock in’ future compliance,” the ATO told the Guardian.

“As a result of the multinational anti-avoidance legislation, we anticipate an additional $7bn in taxable sales each year will now be returned to Australia by multinationals. That’s $7bn in sales booked and the appropriate profit of these activities taxed in Australia for the first time, and locked in for the future.”

In response to a series of questions on the cross-currency swap, Glencore said all its cross-border transactions were conducted on an arm’s-length basis. Glencore said the cross-currency interest rate swap was needed to hedge against foreign exchange volatility which presented “an unacceptable and speculative risk to the listed Glencore group given it would impact the reporting and results of the group.

“As this would have the potential to impact shareholder value, this has been managed by entering into hedging arrangements.

“Following the simplification of Glencore’s Australian tax groups, the accounting and tax reporting in USD has been synchronised with full disclosure to the ATO, such that hedging arrangements are no longer required.”

Glencore said its use of cross-currency interest rate swaps on related party loans had been disclosed and discussed with the ATO: “Our use of cross currency interest rate swaps has not been the subject of an audit and no payments have been required to be made to the ATO. Cross currency interest rate swaps were no longer required once we aligned our accounting and tax reporting to USD from 2016 onwards.”

Indigenous activists join protesters demanding that Glencore close and clean up its McArthur River site in the Top End. Photograph: Essential Media

Glencore – which took over XStrata in 2013 – has operated in Australia for nearly two decades. The company employs more than 15,000 people across 24 mines in three mainland states and the Northern Territory.

The company says it contributed $12bn to the Australian economy last year: paying $1.7bn in wages annually, and $1.3bn in taxes and royalties to state and federal governments. It invests $8m in initiatives with local communities where it works, the company’s website says.

Glencore has attracted fierce criticism for its impact in some of the communities where it has mined. In the Northern Territory, Glencore’s McArthur River mine, one of the world’s largest zinc and lead mines, has been beset by community opposition and contamination scares. For 2015 and 2016 Glencore paid nothing in royalties to the Northern Territory government for McArthur River, by offsetting its capital investments to reduce its royalties bill to nothing.

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Several miners at Glencore’s Oaky North and Oaky No 1 mines in central Queensland have been diagnosed with pneumoconiosis – known as black lung – a potentially fatal disease caused by long-term exposure to coal dust, and that was, until recently, thought to have been eradicated from Queensland more than 30 years ago.

Compounding health fears, Oaky North’s union workforce has been locked out of working in the mine for several months amid a dispute between Glencore and the Construction, Forestry, Mining and Energy Union about mine pay and conditions.

Glencore’s Mount Isa Mine has caused that city to have elevated levels of lead in the air, soil, and drinking water. A Glencore-commissioned report found the mine was a source of “potentially significant” lead pollution, and that young children were most vulnerable to the heavy metal, which can impair intellectual development.